European ABCP continues to assume a more significant role within the evolution of the European securitization market. The European ABCP market showed solid performance so far this year, and the latest figures from Standard & Poor's show a 40% increase in year-on-year figures for June 2002.
The increase is surprising because market analysts have often considered the market ailed by a liquidity drought. Not only does this increase mean that liquidity is there to be had, but the consensus behind this new activity is that it was "fairly" easy to obtain these new lines of liquidity. What this continued surge in activity means is that new banks are securitizing their own portfolios instead of tapping the market through borrowed conduits.
"A lot of that continues to be arbitrage activity," said Perry Inglis at S&P. "What is being funded hasn't changed much; instead, there has been a general growth across the assets. What's amazing is that a 40% increase means that there has been a 40% increase in liquidity provided to the market."
Why the new interest? Although the Basle Accord still threatens to impose a 20% credit conversion factor for liquidity facilities - which are currently zero weighted - the proposed changes won't be implemented until 2006. There is still a chance, Inglis added, that the regulating body might reconsider and move forward with what's best for the banking community. "What's kept these players out is the uncertainty over Basle, but it's certain now that the decision will be drawn out and these banks have taken the business decision that the market is worth getting involved in at the moment."
From March 2002, five new conduits have been rated by S&P, said Inglis, including Quasar Securitization Company NV, Atomium Funding Corp., Diversified Receivables Conduit (Direct) Funding S.A., Giro Lion Funding Ltd., and Grampian Funding Ltd. But the increase in 2002 has maintained a largely one-sided pace - on the commercial side of things there has not really been any activity, primarily because of the pending IAS 39 accounting regulations due out in June 2003.
It's led the motivation for securitization to change over time - now more and more players are not necessarily looking at transactions from
an off-balance-sheet perspective. "Corporations used to ask about balance sheet engineering, and now it's about more important market advantages such as diversification and cost," said Brooks Crankshaw at Bank One. "It's generally cheaper for corporates to fund in the asset-backed finance market, and it offers diversification of funding as well."
For Bank One, adding Euro CP to their U.S.-based conduits adds a funding advantage both from an issuance rate perspective and also from a diversification perspective. "Our investors like to know that the vehicle can issue in a variety of ways; it's just another way to add stability in the vehicle, " said Crankshaw. "When you issue a CP in euros, you have no need to hedge the currency risk for programs financing euro assets as you would when issuing in U.S. dollars."
It's important to consider that the current statistics on European conduit size and performance may not include the growing number of U.S. conduits issuing in the European market. What sort of impact it would potentially have on figures is hard to estimate, said Crankshaw, particularly because its largely a private market; however, he stressed that many of his European counterparts have U.S.-based vehicles that are being used in Europe.
All of Bank One's vehicles are U.S.-based, two of which are used in the European markets: Jupiter, a multiseller vehicle; and Ivory, a securities arbitrage vehicle. At the moment, plans for the bank do not include setting up a euro-only vehicle. "Global issuance is a strategy that is different from our competitors, but one that serves us well because of the economies of scale we achieve by having a few, large, U.S.-based vehicles," said Crankshaw. "Our strategy demonstrates our view of the European market and how it is growing; we definitely believe that this market will continue to grow."
Over the next six to 12 months, the bank plans to double the size of it's current securitization team, adding two new senior originators, two senior associates and a support staff.
Alternative liquidity
Liquidity constraints have given way to creativity in the market, and European market players are gradually becoming more comfortable with alternative options, which have opened the market to new structures. Alternative liquidity funding has been an increasingly important topic. "For this part it is important to note that the more a conduit specialises on one asset type, the easier it is to find alternative liquidity solutions, since solutions are generally designed to cope with one specific category of assets," said Jean-Francois Despoux, head of European securitizations at Societe Generale.
It's given way to the establishment of new vehicles that are increasingly specialised and focused on specific areas such as warehousing for mortgages or specialising in trade receivables. One of the benefits is that the specialization of vehicles can ease the way to handle regulatory and accounting changes.
Some structures considered include co-purchase agreements, which involve two conduits together buying a large pool of assets. It allows for financing of larger transactions without the larger capital allocations required. Credit default swaps are also looked at as alternative liquidity. Past conduits to employ this tool include Moriarity and Atlantis.
In the Atlantis transaction, the conduit entered into a credit default swap with Rabobank, the sponsor. Its commercial paper proceeds are deposited with Rabo Netherlands as collateral for credit protection payments under the swap agreement. The amounts held on deposit are available to pay commercial paper and abolish the need for liquidity facilities.
Another interesting development, which the U.S. market has employed now for years, is the use of a conduit as a warehouse in order to park cash flow assets until sufficient size has been amassed to use public securitizations.
On the arbitrage side, the development of structured investment vehicles (SIV) has emerged as an important trend. Although it is still a relatively minuscule part of the market, the recurrent illiquidity issue promises to continue to highlight the importance of this structure in the future. SG recently developed Pace, an SIV that was launched this July. "The increasing demands from arbitrage conduits and SIVs could progressively have an impact on the spreads," said SG's Despoux.
It's likely that the rest of 2002 will continue along the same pace, and any significant move in the market will probably not happen before 2003. "Generally speaking, the market is highly competitive," said Crankshaw. "We hope that legislation across Europe will continue to be harmonized and more securitization-friendly, and that accountants will reach an agreement on how to account for securitization across Europe. We also hope that investors and users of securitization products will continue to join the growth in both doing and investing in such products."
